Difficult to Ignore Reliance Industries (RIL) !~ It’s a Love and Hate Relationship Alright!
Profitability is Flat at Rs 20000 crs and Networth is Rs 166000 crs (Equity of FV Rs 10 is Rs 3271 crs) for 2011-12 ~Thus an EPS of Rs 61 and Book Value of Rs 507 giving Relative Valuations of a 14 PE and 1.7 PBV
At Rs 850 thereabouts it’s yet touted by Insiders to double by 2015 ! ~ that’s a CAGR of 30% +!
So why is there so much headwind!?~Cynics & Skeptics & RIL Bashers say it is a creation of RIL’s own Making and quite deliberate too ! with tacit government support too !
This is the Situation
- Profitability Pangs ~ RIL is under ‘Growth in Profitability’ pressure as Lower Gas Production and capped till 2014 at US $ 4.2/mmbtu Gas Pricing is affecting Revenues and Profitability ~ Profitability in 2011-12 was flat at Rs 20000 crs ~ same levels as previous year
- RIL’s Demand for Gas Price Increase Rejected ~RIL wants the Gas Price to be adjusted to three times over the current US $ 4.2 mmbtu before 2014 when the New Pricing can be negotiated after it was decided for a period of five years in 2009 ~ Government has quite rightly rejected this demand though Attorney General has adviced it has the prerogative to do so before 2014
- KG-D6 Gas Production Drops ~The Gas Production from the KG-D6 Field has alarmingly dropped to 27.5 mmcmd when in fact it was initially projected to move to 80 mmcmd and even 120 mmcmd later ~ In 2011-12 the average production was 42.65 mmcmd ~Questions are arising as to why this has happened ? Reliance states that Problems relate to unforseen Reservoir Complexities and water ingress ~ The suspicion is that Reliance is bound to sell the gas to the government for allocation largely to power and fertiliser project needs at the contracted price till 2014 of US $ 4.2 mmbtu,but it currently finds operations unviable at this price and expects that the Price will be upward of US $ 15 by 2014 and so is curtailing production and sacrificing current revenues to earn bonanza revenues and returns just two years down the line ~ reduced production also drives up prices ! ~don’t be surprised if it suddenly and timely announces it has discovered more gas reserves ! ~It is suspected that in the late 1990s oil discoveries in Gujarat in a joint venture were not announced until the new NELP was announced in a Chidambaram Budget to get a better pricing from the Government under NELP !~ so it would be a time tested game strategy ! ~ The Truth must be found and told !
- Government yet to give RIL a go ahead on KG Basin Capex Spending ~ RIL is literally threatening the government that unless it clears the US $ 1.6 Billion Capex proposal for 2012/13 it is likely that the Field will be shut down in 2015 ~ Government is skpetical and rightly so ~ though some may accuse it of deliberately playing a pre-meditated gameplan to delay or deny and then give in or compromise ! ! ~ recollect the accusation by no less than, the now seperated in business, Anil Ambani,the brother of Mukesh Ambani who runs RIL,that RIL has deprived the Government of Early Royalties by hugely inflating the Initial Capex of the Basin than what should have been honestly actually incurred ~ If I recollect,the accusation was that the Capex should have been Rs 12000 crs but was inflated and shown at Rs 45000 crs ! ~ the production sharing contract allowed the Contractor to first cover the Investment costs from the Revenues before beginning the Royalties to the Government
Reliance Industries now says it is open to a financial audit for the spending of Billions of Dollars for the KG-D6 Field where the gas production has declined to 27.5 mmcmd per day instead of rising to 80 mmcmd per day and then even 120 mmcmd as originally touted !
RIL sold 30% participatory interest in 21 Blocks including KG-D6 to UK’s British Petroleum in February 2011 for US $ 7.2 Billion and potential Royalties of US $ 1.8 Billion annually
So what is it going to do with all this Cash !?
- RIL has an enabling resolution till January 19,2013 to use Rs 10440 crs =>@ US $ 2 Billion to Buy Back between 3 crs to 12 cr nos of it’s Shares at not more than Rs 870 per share~ till date September 25,2012 it has bought back @ 3.9 cr shares for under Rs 3000 crs ~ with Price at Rs 850 do not expect any more serious buy back quantities
- It has a US $ 1.6 billion Capex Plan pending Government approval
- It plans to reduce Debt significantly~ It has a standalone long term debt of Rs 48000 crs at March 31,2012
- It plans to bid for 2G as well as lay out a nationwide 4G Telecom Footprint
- It plans to invest US $ 8 Billion over time in a State Owned Refinery in Venezuela
Going Forward RIL’s Operating Streams will remain diversified …..Current Core are Oil & Gas & Petrochemicals ~ Scaling up heavily in Telecom is on the cards
So will RIL’s Share Price double by 2015 from the current Rs 850 !? ~ Well, it needs the Government to cooperate and is making every effort that it does ! ~ don’t ask me more !
Remember the Insider Trading Case where RIL benefited over Rs 1000 crs inside 15 days on Reliance Petroleum !? ~ It remains pending with SEBI though RIL has tried to settle it several times through a consent order without accepting guilt
…and in May this year SEBI announced that Insider Trading Cases will be outside the purview of Consent Orders and those accused of perpetrating it cannot therefore apply for a settlement through a Consent Order ! ~ with retrospective effect even for pending matters !? is the question !
Good to be Aware of the Specific Risks !
Reiterate as I stated at the beginning itself ~Difficult to Ignore Reliance Industries (RIL) !~ It’s a Love and Hate Relationship Alright!
Disclaimer ~ I do have RIL in Clients Portfolios and yet retain it in the Core Category ~ because it’s a Huge Behemoth in Tangibly High Investment Core Businesses and such an entity cannot be replicated soon ~ Also Valuations are not obscene ~ The only reservations would be Corporate Governance Issues and to know the real Truth behind the Lower Gas Production
Having said this,please do remember how Reliance taught us a tough lesson in 2008 to 2010 ~ it broke a Myth that one has to be invested in RIL ~ because it has a strong weightage in the Sensex and therefore Sensex and RIL trends are strongly co- related ! ~ Sensex surged from lows of 8000 in October 2008 and March 2009 to highs of 21000 in January 2010 ~ Yet RIL actually sank !